Keystone XL was a monumental turning point…and now Obama is taking on coal

President Obama’s rejection of the Keystone XL pipeline last
November signalled a landmark shift in the US approach to its future energy
needs. He was hailed as the first world leader to refuse a project due to its
effect on the climate.

Environmentalists and the general public alike – quite
rightly – celebrated his decision. Finally, perhaps, leaders were taking this
global threat seriously.

While the denial of the tar sands pipeline is clearly an
important move, when it comes to tackling climate change, coal remains the
biggest contributor to carbon emissions. And this is where the current
administration has a chance to build on the Clean Power Plan and bring rational
forces to markets.

Overall the US provides
more than $20 billion a year in subsidies to the production of fossil
fuels. While the bulk of this is directed towards oil and gas companies, coal
producers also reap significant benefits. When coal’s high carbon content is
taken into consideration, subsidies and state support offered to this fuel are
likely have the highest climate impacts.

Reducing this support to coal production could therefore be
one of the US government’s next key climate policies. It looks like in 2016,
the Obama administration may finally be taking this on.

This could be an important move for the US in finally
meeting its commitments to phasing out fossil fuel subsidies. In spite of declining
global demand for coal, the US government is continuing to provide significant
subsidies to coal mining. In the Powder River Basin (PRB) – the largest reserve
in the US, supplying 40% of the country’s coal – something perverse is
happening.

First off, although huge amounts of coal come from
government-owned land in the PRB, it is for some reason not officially
designated as a ‘coal-producing region’. This means that coal companies are
able to lease federal lands at a lowered cost. And these under-valued leases
added up to a subsidy to coal companies, and lost revenue to the government, of
more than $1 billion in 2012.

Meanwhile, the government is also subsidising coal from the
PRB through below market royalties. Currently, royalty payments for coal from
the PRB are based on the initial, as opposed to the final, sale price. This
creates a loophole that some companies exploit by selling coal to their own
affiliates at a below market price thereby paying a low royalty, after which they
then go on to re-sell the same coal to foreign buyers at a far higher price. A
2012 Reuters investigation estimated that this loophole cost the government
$40 million on coal exports from Wyoming and Montana in 2011.

The costs of these subsidies to coal in the PRB are hitting
US taxpayers through lost state revenue, and through huge climate impacts. Coal
from the PRB is used in over 200 power plants across 35 states, making it
one of the US’s largest sources of greenhouse gas emissions, equivalent to the
annual emissions of 70% of all cars registered in the US. The US government’s
continued subsidies to coal mining in the PRB mean it is paying fossil fuel
producers to undermine its own climate commitments.

A recent report showed, for the first time, the climate benefits
that could arise from eliminating subsidies to coal production in the PRB.
This research found that removing these subsidies – amounting to nearly $8 per
tonne – would materially reduce domestic coal demand in the United States (by
between 8% and 29%) and result in cumulative emissions reductions of 0.7 to 2.5
gigatonnes (Gt) of CO2 to 2035. For comparison, India’s CO2 emissions from
fossil fuel combustion and industrial processes were 2.1 Gt in 2013.

By rejecting the Keystone XL pipeline, President Obama
showed true leadership and signalled a potential shift in the battle against
dirty energy. It is commendable that the US government is now taking on coal,
and moving one step closer to removing perverse support to fossil fuel production.

Shelagh Whitley is a Research Fellow at the Overseas
Development Institute and Mark Fulton is the Founding Partner at Energy Transition
Advisors (ETA) and Advisor to Carbon Tracker Initiative